Overview of a Financial Accounting System • Financial Statements • Nature of Transactions • Steps in the Accounting Process • Post-Closing Trial Balance • Relationships Among Financial Statements, Trial Balances, Ledgers, Journals, Documents, and Transactions • Internal Controls
Financial Statements mmm... it looks like these are fairly stated according to GAAP. CPA
Nature of Transactions • Exchanges between business firms, for example: • Sale to a customer, • Purchase of goods, • Payment or receipt of cash • Adjustments to accounts, for example: • Recording of accrued salaries, • Depreciation expense, • Adjustments to prepaid accounts
Transactions Occur While a Business Goes Through Four Major Cycles
Four Major Cycles of business operations Financial Cycle
Four Major Cycles of business operations Expenditure Cycle $ Financial Cycle
Four Major Cycles of business operations Expenditure Cycle R. M., D.L., P. P. Eq. $ Financial Cycle Conversion Cycle
Four Major Cycles of business operations Expenditure Cycle R. M., D.L., P. P. Eq. $ Financial Cycle Conversion Cycle Finished Goods Revenue Cycle
Four Major Cycles of business operations Expenditure Cycle R. M., D.L., P. P. Eq. $ Financial Cycle Conversion Cycle $ Finished Goods Revenue Cycle
Documents Prepared Before the transaction At the same time After the transaction Internally Prepared Purchase order Receiving Report Sales Invoice Customer purchase order Externally Prepared Shipping Document Vendor’s Invoice
Every transaction during an accounting period is recorded in a journal, Debits and credits for each transaction must be equal, Use of special journals reduces the recording costs and facilitates the search process. The number and titles of special journals will depend on the accounting information needs and system design preferences of management. Typical Journals: Sales Journal, Cash Receipts Journal, Purchases Journal, Cash disbursements journal, Payroll journal, General journal. Record in Journals
Post to Ledgers • General Ledger • The number and description of general ledger accounts depend on the needs of the management and all account titles for a company are included in the chart of accounts. • All transactions must be posted from the journals to the general ledger before financial statements are prepared. When specialized journals are used some similar transactions are grouped and only the total amount is posted to the general ledger. • It includes the accumulated total of all transactions, since the inception of the company.
Subsidiary Ledgers Used to handle detailed information for a general ledger account. Agrees in total to the corresponding general ledger account. Same amounts are posted to both subsidiary and general ledgers. Typical Subsidiary Ledgers: Accounts receivable, Accounts payable, Delivery equipment, Depreciation expense, Accumulated depreciation, Common stock, Inventory Post to Ledgers
Unadjusted General Ledger Trial Balance • List of all general ledger accounts, • Prepared as an aid in preparing adjusting entries. • Before an unadjusted trial balance is prepared all the transactions other than adjusting entries must be recorded in the journals and posted to the ledgers.
Prepare and Post Adjusting Entries • Prepared at the end of the period before the preparation of the financial statements, • every adjusting entry effects both the balance sheet and the income statement, • Total debits = total credits, for each adjusting entry, • recorded in the general journal, • each prepared separately, • posted individually to the proper ledger account, • most adjusting entries are not posted to subsidiary ledgers.
Six General Types of Adjusting Entries • Prepaid expense • Accrued expense • Accrued revenue • Unearned revenue • Estimated items • Inventory adjustment
Worksheet Unadjusted Trial Balance Adjusted Trial Balance Income Statement Account Adjustments Balance Sheet Income Summary - Net Income (Loss)
Prepare Financial Statements • Income statement, retained earnings statement, balance sheet, and cash flow statement • Descriptions and details must be stated according to GAAP, • Similar account balances are summarized in to summary accounts, • Accounts are grouped, current and non-current, operating and non-operating, etc. • Footnotes and other required disclosures made.
Closing Entries Made • At the end of each accounting year, all nominal accounts are closed. • We don’t necessarily close the accounts every time we prepare the financial statements, only at the year end. • Nominal accounts are: • Revenue accounts, closed to Income Summary. • Expense accounts, closed to Income Summary. • Income Summary Account, closed to R/E. • Dividend Account, closed to R/E. • Drawing accounts in partnerships and sole proprietorships, closed to the partner’s Capital Acc.
Closing Entries • Complete the accounting process for the current period, • Prepared after all the adjustments are recorded in the journals and posted to the ledger. • All nominal accounts must be closed out, so that the company starts a new year with zero balance in those accounts. • Each closing entry must be recorded in the general journal and individually posted to the appropriate general ledger account.
Flowcharting • Need for a written description of an Accounting System, • Narrative descriptions, • Flowcharts • Systems flowchart • Internal control flowchart • Program flowchart • Flowcharting symbols, • Flowcharting techniques, • Overall approach.
Need for a Written Description • Completeness and effectiveness of an accounting system, • Provides a record for training new employees and reminding old ones how the system should operate, • Assists in making improvements to the existing system, • Serves as a communication tool in explaining the system • to company personnel • to people out side the company such as independent auditors.
A Description of an AIS should include • The origin of every document and record in the system, • All processing that takes place, • The disposition of every document and record in the system. Such as filing, sending documents to customers or other departments, or destroying documents. • The department or personnel performing the duties. • The existing internal controls • separation of duties • authorizations and approvals • internal verification
Narrative Descriptions • A written description of a company's AIS. • It is difficult to describe a complex accounting system in a narrative, • Lengthy explanations are difficult to understand and remember. • However, it is OK to use narratives for simple systems if it is simple and it includes all the important information a description should include.
Flowcharts • A graphical description. • Three common types of flowcharts are used in describing an AIS, • Systems flowchart, shows the flow of documents and records in the organization. • Internal control flow chart, same as a systems flowchart but also shows the segregation of duties, and other internal controls. • Program flowchart, very detailed and usually used only by the programmers and other computer specialists.